The effect of macroeconomic factors on Indian share prices: A sectoral approach

Abstract

The influence of macroeconomic factors on stock prices has attracted immense attention in recent years. The subject is being considered significant in both academic research and practical investment analysis. It is a common knowledge that fundamental analysts try to identify the trend in several macroeconomic variables and accordingly its effect on stock returns. The success of ‘buy and hold’ strategy adopted by these investors who focuses on ‘intrinsic value’ of assets is assumed to depend largely on future movements in various macroeconomic variables that directly or indirectly affect a firm’s business operations and thereby its stock returns. Considering the two significant sectors of Indian economy viz. manufacturing and financial services sectors, we address the following issues: (A) Does the long-run relationship exists between macroeconomic variables and stock prices in manufacturing and financial services sectors in India? (B) Is there any significant difference between macroeconomic factors affecting stock returns in manufacturing sector and those in financial services sector?